Households in debt: one outcome of the crisis
By the end of October 2011 there were already 144,382 households in Hungary with arrears totalling HUF 983.2 million (€3.28 million) of over 90 days on their mortgage loan. The increasing foreign exchange rate is the main reason for this as many borrowers have loans on a euro or Swiss franc basis. The government and the banks have put forward proposals, based on cooperation and partitioning of the financial load, to save families from eviction due to mortgage debt.
A desire to preserve tradition and usual practice means that owning a house is viewed as a necessity in Hungary. People are very unwilling to let or rent their homes and the relevant legislation is not sufficiently developed. Government initiatives tend to deal more with the acquisition or building of properties rather than with the rental and letting of accommodation. An official communiqué issued in October 2011 (in Hungarian, 728Kb PDF) blames the problem of household debts on the termination of the state-supported home-making loans (otthonteremtési hitel) by the Hungarian Socialist Party (MSZP) when it was in office back in 2003.
Home loan practice
In the past, Hungarian families have tended to choose cheaper loans in foreign currencies to buy their properties. These loans today amount to around HUF 2,800 billion (€9.4 billion as of 13 June 2012).
According to government data, 576,000 households had mortgages in 2011. Two-thirds of the borrowers (68%) had children, of which 172,000 families had two children and 67,000 families had three children. Some 80% of borrowers were below 50 years of age. Two-thirds were in full-time employment while, in 72,000 households, everyone was either inactive or unemployed.
Half the borrowers (287,000 households) had mortgages based on euros or Swiss francs (CHF) rather than on Hungarian forints (HUF). Of these 21% were reported to be having difficulties in 2011 repaying these loans (28% of these had three children).
Households in the countryside were more indebted in 2011. In Budapest, 7,000 families were having difficulties paying for their foreign exchange loans as were 54,000 households in the countryside. According to figures (in Hungarian) from the Central Statistical Office (KSH), 1,742,000 (17.5%) of the total population of 9,962,000 were living in Budapest on 1 January 2012.
At the end of October 2011, 144,382 households (11% of all debtors) had already had arrears of HUF 983.2 million (€3.28 million) for over 90 days on their mortgage loans, primarily due to the increasing foreign exchange rate. The borrowers had obtained their loans on a euro or Swiss franc basis and so their monthly repayment depends strongly on the current exchange rate. Most of the borrowers had taken out their loan on a Swiss francs basis five years ago when the exchange rate was HUF 160–175. At the beginning of 2011, the exchange rate was already HUF 225. It fell to HUF 200 in June but climbed back to reach its highest point in August 2011 at HUF 267.7. A similar trend was observed in HUF to EUR rate (a scale from 245 to 322).
On average, loan rates have increased by 35% (EUR) and 50% (CHF) since 2007, while households’ real incomes in Hungary have shrunk by 2–3% over the same period.
It was estimated that at least 130,000 households are threatened with homelessness due to their debts. But according to a press release issued on 2 March (in Hungarian) from the Court Executive Chamber, no more than 250–300 evictions are expected during 2012.
Measures to protect households
Since 14 August 2010, Hungarians have not been allowed to take out foreign exchange mortgage loans. The government also dedicated 2011 to saving households in debt. Its first step was the ‘Homemaking Strategy’ which incorporated an auction and an eviction moratorium to avoid people becoming homeless. The strategy also involved:
- reducing administrative costs;
- changing the regulations on the juridical enforcement of evictions;
- providing temporary fixed rate foreign exchange loan repayment options;
- setting up the National Asset Management Company Ltd (Nemzeti Eszközkezelő Zrt.) and making it responsible for housing those who cannot pay off their loans.
These measures were aimed at households that could in general repay the debts but which needed a reduction in the exchange rate to enable them to fulfil their payment obligations.
On 26 September 2011 the government announced the possibility of lump sum early repayment, which allowed households to repay their loans in one step until the end of February 2012 at a reduced foreign exchange rate (CHF 180 or €250).
These measures were criticised by the banks as soon as they were announced because householders had voluntarily signed legal contracts in which they had accepted the risk of changes in the exchange rate, while the banks had liabilities in the foreign exchange markets.
Alongside these governmental measures, the banks have also accepted the need to find individual solutions for those households in debt. Various banks have offered payment options for households with mortgage debts including:
- extending repayment schedules;
- offering low-rate HUF credit;
- extending the deadlines for fines or other penalties when borrowers have arrears;
- extending the opening hours of their credit consultancy services.
In response to the national and international feedback, the criticism and the overwhelming level of household debt, the government restarted the consultation with the Hungarian Banking Association (Magyar Bankszövetség) and on 15 December 2011 concluded an agreement on a tripartite sharing of the burden, which stated that the extra expenses due to the high exchange rates must be shared among the parties. Under the agreement, the state took over two-thirds of the extra expenses and the bank took over the other third. Householders are obliged to pay their original commitments until 2015.
In March 2012 the government confirmed this measure for all foreign exchange rate loans below HUF 20 million (€67,200) effective from 2 April 2012. In the first wave, the help was available for public employees in debt. From June 2012 all households having home mortgage loans are eligible and, from September 2012, all those with foreign exchange loan debts.
In addition to these measures, the government has provided tax-free grants of HUF 7.5 million (€25,200) to private sector employers so that they can help employees with mortgage debts. The scheme will be extended to the public sector with priority given to families with greater numbers of children.
By the end of January 2012, 141 early repayment contracts totalling HUF 776 billion (€2.67 billion) had been signed at a favourable exchange rate (at the current exchange rate the value would have been HUF 1073.7 billion (€3.7 billion)), of which 96% involved mortgage loans on a Swiss franc basis. This number represents around 1% of all households seriously in danger of becoming homeless. The repaid loans averaged HUF 5.5 million (€18,500) and only in 35% of cases made use of new loans based on the Hungarian forint. Most of the repayments were achieved by using savings, selling properties or using other financial sources.
However, there are still many householders who cannot make use of the favourable early repayment terms because:
- they are not a public employee or they are unemployed;
- the level of real wages has declined due to the new taxation system (HU1011011I, HU1104011I);
- the real value of wages has been also been hit by increasing consumer prices.
This situation could probably have been avoided if a unified and strong governmental financial management system had been put in place in 1990, when Hungary’s first democratically elected parliament since 1945 took over the government of the country. While households are primarily responsible for their own financial decisions, the long-lasting uncertainty affecting the planning of long-term investments, coupled with the ‘attractive’ and often persuasive advertising of property loans by banks has led to the current situation.
Another factor in households’ decision to opt for euro/Swiss franc loans was the belief that Hungary would sooner or later become a member of the euro zone and this would be favourable to the national economy. The banks are naturally interested in maximising their profit, but the economic crisis has also caused them difficulties. The government must also take responsibility for the current situation, but it is questionable how far it is able to counteract trends in the world financial market and override legal contractual agreements.
The most important lesson learned from the current problem in Hungary could be that proper information and consultation on financial issues must be a priority for all parties – banks, households and government.
Zsuzsa Rindt, Solution4.org